The applicability of forensic auditing in Maltese corporate service providers : an investigation

Abstract

PURPOSE: This investigative study aims to gauge the CSPs’ perception of fraud and their opinion regarding current national anti-fraud related matters, to analyse the preventive, detective and investigative measures adopted by the respective CSPs in order to combat fraud, to study the applicability of forensic auditing within the CSPs industry with reference to the Big Four audit firms’ practices and to evaluate the degree to which forensic auditing is practical to CSPs. DESIGN: The objectives of this study were achieved through semi-structured interviews with 2 categories of respondents, being experts and CSPs. These are the Big Four audit firms, the MFSA, the FIAU, the MLU and twelve CSPs. FINDINGS: The study reveals while CSPs are aware of fraud risk they tend to underestimate internal fraud. The findings also show that CSPs are abreast with the current national anti-fraud related matters. It also transpires that the strategies for the detection and prevention of fraud are applied internally, specifically through internal control mechanisms and monitoring and management review. Also, fraud investigation is done through an internal systematic process. Forensic auditing is generally equivocal to CSPs and it is only practised by the Big Four, where reactive audits are more frequent when compared to proactive forensic audits. Whilst some CSPs consider getting engaged in a forensic audit exercise, they do not consider employing a forensic audit expert. The CSPs are divided with regards to advocating for reactive and proactive types of forensic auditing but the former is considered to be more practical. As a general finding, even though the CSPs recognise the benefits of forensic auditing, the associated costs outweigh the said benefits. CONCLUSIONS: CSPs prefer to deal with fraud internally than engaging in forensic auditing. Nevertheless, CSPs do not exclude the applicability of reactive forensic auditing, depending on the event’s seriousness. More specifically, the medium-sized CSPs are quite willing to engage in any type of forensic auditing exercise, depending on the current efficacy level of the firms’ internal controls. VALUE: Considering the size of the CSPs industry and the perception gap between the experts and CSPs about the adequate level of internal controls that an entity ought to maintain, this study shows that with an adequate application of elements of forensic auditing might bridge this gap to combat fraud.